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Apr 21, 2017

Why a universal basic income is a terrible idea

A "universal basic income" is often promoted as a solution for inequality, but it would actually make things worse, writes Labor MP for Fenner and Shadow Assistant Treasurer Andrew Leigh.

Using social policy to reduce inequality is almost precisely the opposite of the suggestion that Australia adopt a “universal basic income”. Here’s an illustration of how that might work out. Suppose we got rid of all our current cash transfers and replaced them with a flat-rate universal basic income. Current spending would support a payment of around $6000 per person.

Every millionaire and billionaire would be thousands of dollars better off. But every pensioner would be in abject poverty — barely able to buy food, let alone pay their bills. Australia’s social safety net reduces inequality by 10 Gini points, while a universal basic income — by design — has zero impact on inequality. So scrapping the social safety net in favour of a universal basic income would increase the Gini by 10 points — making Australia as unequal as Latin America.

Some argue that a universal basic income should be paid for by increasing taxes, rather than by destroying our targeted welfare system. But I’m not sure they’ve considered how big the increase would need to be. Suppose we wanted the universal basic income to be the same amount as the single age pension (currently $23,000, including supplements). That would require an increase in taxes of $17,000 per person, or around 23 percent of GDP. This would make Australia’s tax to GDP ratio among the highest in the world.

So next time someone advocates a universal basic income, ask them how they’d like to pay for it: by making Australia the most unequal country in the world, or by making Australia the most highly-taxed country in the world.

Andrew Leigh is the Shadow Assistant Treasurer. This is an extract of a speech delivered at the Australian National University on 20 April 2017, titled “How Can We Reduce Inequality?

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33 comments

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33 thoughts on “Why a universal basic income is a terrible idea

  1. Duncan Gilbey

    Closing existing tax loopholes could go a fair way towards it. I’m surprised that the Shadow Assistant Treasurer didn’t mention that (but why bother looking at possible solutions when the decision has apparently already been made).

    1. drsmithy

      What’s more surprising is apparently the “Shadow Assistant Treasurer” thinks taxes fund Federal expenditure.

  2. Eva Cox

    What amazing crap from someone who is an economist with a social doctorate. there are many ways to offset the costs eg cut super tax concessions and offer a universal aged pension, which improves gender equity and even may produce a surplus. This is an emotive response from someone who is over-reacting to the idea that maybe recognising non paid work contributions may undermine the workers ‘ party

    1. AR

      Eva – I don’t find it all amazing, given that economics is the most useless of all disciplines.
      All sorts of pretty models & beautiful numbers which bear no relation whatsoever to the real world.
      In medicine it would be described as the treatment was a success but the patient died. Horribly & painfully.

  3. Eva Cox

    What amazing crap from someone who is an economist with a social doctorate. There are many ways to offset the costs eg cut super tax concessions and offer a universal aged pension, which improves gender equity and even may produce a surplus. This is an emotive response from someone who is over-reacting to the idea that maybe recognising non paid work contributions may undermine the workers ‘ party
    NB crikey this is not a duplicate

  4. Justin

    I’m not necessarily sold yet on the idea of a basic income. But this opposing argument was a weak one. It seems to essentially boil down to this fact: a basic income would need to be paid for by high taxes.
    But so what? If everyone had enough money to live, and worked for passion, fun, or to earn extra money on top of a living wage, who cares if we are taxed 50-60% for that wage? the tax wouldn’t impact anyone’s health because we already have enough money to live.

    There are two real questions that old mate Leigh doesn’t even consider:
    (1) what proportion of the current working population would still work, even if they didn’t need to in order to live? The proportion would have to be large enough to sustain the population.
    (2) how do we work out what a “basic wage” is. I wouldn’t go by the aged pension. 23k a year barely covers living expenses if you rent.

    1. Draco Houston

      Point 1 is moot because there are not enough jobs. What the currently employed do when given their meager stipend is irrelevant, there is a mass of unemployed people who would otherwise be working before UBI, and there would still be so after UBI.

      Which begs the question, who are you going to tax? The problem is only going to get worse, regardless of if workers decide they’d rather be on the dole than get paid a decent wage (btw no one does this)

      1. Justin

        I suppose my phrasing was unclear. Under a UBI system, the proposition is that not everyone needs to have a job, because they’d have enough money to live anyway. So the need for there to be “jobs for everyone” doesn’t apply in such a system. The high taxes would only be applied to those lucky enough to have a job, and then only their “extra” income would be taxed at a high rate.

        I agree most people on unemployment benefits are not there by choice. Especially when you consider the abs stats, that show an estimated 75k jobs available in feb but more than double that of people looking for work within the same measurement period. But I imagine you are saying that, since job availability is shrinking, it’ll continue to shrink to the point that even a UBI system would be unable to cope with the number of work opportunities available?

        1. Draco Houston

          Yeah that is pretty much what I am saying. It doesn’t seem like a permanent solution, and personally I find it lacking as a temporary solution. The center-left ideal version has to pass in full for it to not be a loss for the unemployed. If that passes workers end up being taxed much more to have it passed back to them. who benefits from this other than the employer, who now has a principle of a wage being Extra Income and not the means of subsistence?

          We could be asking for welfare reform to cut red tape for recipients and refocus the bureaucracy on more important things like finding cash in hand workers and their law breaking employers.

          We could be asking for a lower work week. 32 hours would be 1 day less work, raising wages and creating jobs. A more radical cut to 15 hours or less could restructure peoples work lives into something that makes sense. Imagine 3 shifts of 5 hours and yet you’re paid like you worked 5 shifts of 8? A lot of unproductive businesses would have to close down with wages like that, but really, why keep them? Let’s extend the good work to as many as possible.

          We could even be ambitious and ask for the end of paid work, of wages, salaries, and cash transfers. Where a community of free producers can share the necessary work and do whatever they want with the rest of the time. Giving their surplus to a global association of free producers, giving within their abilities and receiving to their needs. This has about as much chance of getting up as welfare that ends the need for wage labour, so why not go big?

      2. Woopwoop

        Yes, but there are jobs nobody would do unless it was financially worth their while, aren’t there?

    2. drsmithy

      There are two real questions that old mate Leigh doesn’t even consider:

      Even more importantly:

      Within two generations – three at the outside – something like half the population will be literally unemployable. Not because they lack skill or motivation, but because there is nothing they can do that a compute or robot can’t do faster, better and cheaper.

  5. Eva Cox

    Sorry didn’t realise it had gone, but reading it twice is not disastrous. The idea of a UBI is worth discussing, not dismissing, given the mess of the welfare system. Andrew should focus on rejecting the useless Cashless Welfare Card that is being promoted by Twiggy but fails to address issues like the Income Management programs in the NT it closely resembles. And getting rid of both would save money or replace them with a UBI at less cost and damage to self esteem.

  6. Draco Houston

    I like to bring up current targeted welfare whenever some UBIer quotes some number for what the payment would be annually. Usually their number is worse than the normal adult dole without additional loadings, for little things like not letting your children starve to death, putting a roof over your head etc.

    UBI does nothing for the unemployed, it will not have the effect of freeing people from work like many center-left people claim. It subsidizes wages on the public purse, paid for by you, me, and everyone. You might as well just make cash in hand off the books work legal, it’d have the same effect.

  7. Brett D. Wright

    Andrew Leigh is not sure how big a tax rise the advocates of a UBI are seeking, and it’s obvious from his examples he’s not much interested in finding out. When Leigh says a UBI equal to the age pension would make Australia the most highly taxed country in the world, what he means to say is that our tax to GDP ratio, currently among the lowest in the OECD, would rise to the level presently endured (or enjoyed) by Denmark and Sweden. But this is a straw man’s argument. A more modest tax rise – say, to fund a UBI of $6000, on top of the current cash transfer – would increase our tax to GDP ratio to that of those notoriously socialist utopias, Spain and the UK, both OECD countries with a similar economic role for government as Australia and with similar government spending to GDP ratios. I don’t necessarily agree with the idea of a UBI but surely it’s a debate worth having with more genuine intent than that displayed by this leading economist turned Labor politician.

  8. Roberta Stewart

    Andrew Leigh has failed to take into account that a UBI is not necessarily financed by specific or regimented economic model. He is arguing a point that has not been made or set out essentially. In order for a UBI to be implemented here is would have to supported by supplementary policies and those who are more dependant than others (the elderly and unwell) would require supplementary means tested benefits on top of a UBI payment. It appears he has only reviewed the concept at a glance.

  9. Wayne Cusick

    Surely a Universal Basic Income is not to tackle inequality but to support people of the future whose prospects of getting a job, any job, will be greatly diminished by technology?

  10. Dog's Breakfast

    Well, I’m sure that Andrew went on to say some more sensible things, but I’m a bit disappointed in the linear thinking both here and in the comments section.

    Bugger $6K a year, what’s the point. Go for gold – Set it at $40K to $45K for all over 18’s, completely break the system down.

    High tax rates once you start working – sure would be. Disincentive to work – really, only if you believe that people work because they need money, and once they have the money incentive taken out they will all just sit on their arses. Remove the incentive of money and people may just do useful things rather than the vast and overpaid crap that most of us spend our time on. I would be looking at setting the tax rates for paid work such that you would work out about square around $80k above the $40K UBI (equivalent to current rates at $120K income) Everyone earning over that gets taxed hard because the marginal levels are set high. Companies pay real taxes, the tax act simplified, Cayman Islands accounts banned, trusts restricted to the very few real cases they are needed, multi-nationals paying tax, a Tobin tax. Christ, the cupboard isn’t so much bare as overflowing for anyone with the imagination.

    Possible result – very few people around to do all those high paying gigs – what’s the point with those high tax rates!

    Consequence, the vast majority of people earning big money today are not the creators, the manufacturers, the builders and the makers, they are bloody technocrats that we won’t know are gone. Very few add a scintilla of value at all those meeting they go to. CEO’s and chairs and board members will have to do it for the prestige and because they like it. The majority, realising that they lead worthless lives and the recompense reflects that, move into doing something useful – picking up rubbish at local parks, land care, environmental renewal, talking to their neighbours and bringing up their kids.

    God, how awful it could all be.

    Company tax rates wouldn’t have to be set much higher than currently, just close all the bloody loopholes, including writing off legal and accounting services as a tax deduction.

    Yeah, I know, but that’s different. It’s also non-linear, it also opens up infinite possibilities, it also doesn’t need to be perfect immediately, it’d probably take a generation for it to bed in, with older people wringing their hands the most. Boy, you’re right though, everything is working so perfectly now, we’d really be taking a great risk!!! (Sarcasm, or irony, I can’t be sure)

    Start with DrSmithy’s clarification that taxes aren’t actually there to fund Federal expenditure, and then go to town.

    How will it work out? I don’t really know, but can you think of a more useless technocratic society than what we have today? This is not the best of all possible worlds, what we have today is probably the worst and least efficient society we could possibly we with all the advantages at our disposal.

    And introduce Nicholas Gruen’s people’s bank – that’s the first order of business.

    As Aretha Franklin says, “Think!”

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